UPSC Economics Business and Foreign Trade / व्यापार और विदेश व्यापार Foreign Trade and Investment in India

 

FOREIGN TRADE AND INVESTMENT IN INDIA

 

Introduction

 

·                     Foreign trade is exchange of capital, goods, and services across international borders or territories, which involves the activities of the government and individuals.

 

·                     In most countries, it represents a significant share of gross domestic product (GDP). Foreign trade in India, includes all imports and exports to and from India. At the level of Central Government it is administered by the Ministry of Commerce and Industry.

 

 

 

FOREEIGN EXCHANGE RESERVES

 

 

·                     Foreign exchange reserves also called Torex reserves or FX reserves are assets held by a central bank or other monetary authority, usually in various reserve currencies   and used to back its liabilities e.g. the local currency issued, and the various bank reserves deposited with the central bank by the government or by financial institutions.

·                     The foreign exchange reserves of India comprise of four elements:                                              

            (i) Gold,

            (ii) Special Drawing Rights (SDR),

            (iii) Foreign Currency Assets (FCA).

            (iv) Reserve Position in the IMF

·                     India?s foreign exchange reserves as on 17th  March 2017  is US366-78 billion

 

 

 

Gold

 

·                     It accounts for only 5 % of our foreign exchange assets.

 

Special Drawing Rights (SDR)

 

·                     An international type of monetary reserve currency, created by International Monetary Fund (IMF) in 1969 which operates as a supplement to the existing reserves of member countries.

·                     It is also known as ?paper gold?. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs are designed to augment international liquidity by supplementing the standard reserve currencies.

·                     Its value is based on a basket of five key international currencies and SDRs can be exchanged for freely usable currencies. The basket of five international currencies includes US dollar, euro, Chinese yuan, Japanese yen and

            British pound.

 

Foreign Currency Assests (FCAs)

 

·                     Foreign currency assests include foreign exchange reserves except gold holdings, special drawing rights and India's reserve position in the IMF.

·                     Foreign currency Assets are mainly composed of US dollar in the form of US government bonds and institutional bonds.

Foreign Exchange Market

·                     It is the market in which national currencies are traded for one another. The major participants in this market are commercial banks, foreign exchange brokers and other authorised dealers and monetary authorities.

 

Exchange Rate

·                     The price of one currency in terms of the other is known as the Exchange Rate.

 

Foreign Exchange Management

·                     Foreign exchange management can be conducted in three possible ways: Fixed exchange rates, floating exchange rates and managed exchange rates.

 

Fixed Exchange rates

·                     Fixed rates are currency values which are tied to a precious metal such as gold, or anchored to another currency, like the US Dollar. This method was brought by the International Monetary Fund (IMF).

·                     The IMF system involved the USS as the anchor for the system with the US given a specific value in terms of gold, and other currencies were then given a value in terms of the USS, such as £1 = S2.40. India was part of this regime too and in 1948, IS was equal to Rs. 3.30.

·                     However, the system collapsed in 1971 for a variety of reasons, including the buildup of US debts abroad as a result of the need to fund the war in Vietnam, inflation in the USA and growing; doubts about the stability of the USS.

 

Floating Exchange Rates

·                     Under a floating system, a currency can rise or fall due to changes in demand or supply of currencies on the foreign exchange market.

·                     The advantages of floating exchange rates are flexibility and automatic adjustment in case of balance of trade disequilibrium.

 

Managed Exchange Rates

·                     This is a combination of fixed and floating rates. In today?s economic situation, almost all countries follow this system of exchange rate determination. The governments usually let the market determine the exchange rates but intervene whenever needed.

 

Reserve Tranche Position

·                     Each member of the IMF is assigned a quota, part of which is payable in SDRs or Specified usable currencies and part in the member's own currency.

·                     The difference between a member's quota and the IMF's holdings of its currency is a country's Reserve Tranche position (RTP).

 

INDIA'S FOREIGN TRADE

 

·                     The exchange of goods among people, states and countries is referred to as trade. Trade between two countries is called International Trade. Export and Import are the components of trade. The balance of trade of a country is the difference between its export and import. When the value of export exceeds the value of imports, it is called a favourable balance of trade. On the contrary, the value of imports if exceeds the value of exports, it is termed as unfavourable balance of trade.

·                     Beginning mid-1991, the Government of India introduced a series of reforms to liberalise and globalise the Indian economy. Reforms in the external sector of India were intended to integrate the Indian economy with the world economy. India?s approach to openness has been cautious, contingent on achieving certain preconditions to ensure an orderly process of liberalization and ensuring macroeconomic stability.

·                     This approach has been vindicated in recent years with the growing incidence of financial crises elsewhere in the world. All the same, the policy regime in India in regard to liberalization of the foreign sector has witnessed very significant change.

·                     The Import policies prior to 1992 contained an Open General Licence under which specific goods could be imported and exported by specific categories of importers and exporters subject to fulfilment of certain conditions.

·                     In 1992, the policy was amended to open general licence and allow imports and exports of all goods without a licence, except those specifically mentioned in a small negative list.

·                     In 1950s, India?s share in the world trade was 1.78% which was decline to 0.59% in 1990 and remained low for many years. India?s share in world trade is currently around 2% (2015) and our country has set for itself the ambitious target of gaining 3.5% of world trade by 2020.

·                     As per the rankings of WTO for the year 2015, India was 19th largest exporter (with a share of 1.62%) and 13th largest importer (with a share of 2.34%) of merchandise trade in the world. In commercial services, India is the 8th largest exporter (with a share of 3.27%) and 10th largest importer (with a share of 2.65%). Service surplus financed around 53% of merchandise trade deficit during 2013-14.

            India has been pursuing a policy of market diversification directing her export promotion efforts at Asia and ASEAN, Latin America and Africa through Focus Market Initiatives and bilateral trade agreements.

 

Composition of India?s foreign trade

 

Composition of Indian foreign trade means major commodities in which India is doing export and import.

Imports: India?s imports are classified into Bulk Imports and Non - bulk Imports

Bulk Imports include ?

(i)         Petroleum, crude and products

(ii)         Bulk consumption goods - cereals, pulses edible oils and sugar.

(iii)        Fertilizers, non - ferrous. Metals, paper and paper boards, rubber, pulp and waste paper, metallic ores, iron and steel.

 

Non-bulk Imports include -

(i)         Capital goods - metals, machine tools, electrical and non-electrical machinery, transport equipment and project goods.

(ii)         Pearls, precious and semiprecious stone, organic and inorganic chemicals, textile, yam and fabrics,cashew nuts.

(iii)        Artificial resins and plastic materials, professional and scientific instruments, coal and coke, chemicals, non- metallic mineral manufactures etc.

 

Exports

 

Exports of India are broadly classified into four categories.

(i)         Agriculture and allied products (include coffee, tea, oil cakes, tobacco, cashew kernels, spices, sugar, raw cotton, rice, fish, meat, vegetable oils,      fruits, vegetables and pulses)

(ii)         Ores and minerals (include manganese ore mica and iron ore)

(iii)        Manufactured goods include textiles and ready-made garments, jute manufactures. Leather and footwear, handicrafts including pearls and    precious stones,  chemicals, engineering goods and iron steel.

(iv)        Mineral fuels and lubricants.

 

Recent Data of India's Import and Export

(September 2016)

MERCHANDISE TRADE

 

Exports and imports : (US Million)
(Provisional)
	September	April- September
Exports (including re- exports)
2015-16	21869.36	133723.24
2016-17	22880.56	131400.50
%Growth 2016 -7/2015-16	4.52	-1.74
Imports
2015-16	32035.32	202269.62
2016-17	31220-13	174409.62
% Growth 2016-17/2015-16	-2.54	-13.77
Trade Balance
2015-16	-10165.96	-68546.38
2016-17	-8339.57	-43009.12
Exports and Imports : (Rs. Crore)
(Provisional)
	September	April-September
Exports (including re- exports)
2015-16	14484.06	858622.52
2016-17	152699.59	879475.63
% Growth 2016-17/2015-16	5.45	2.43
Imports
2015-16	212130.85	1298646.11
2016-17	208356.00	1167458.25
% Growth 2016-17/2015-16	-1.78	-10.10
Trade Balance
2015-16	-67316.79	-440023.59
2016-17	-55656.41	-287982,62

 

Service Trade

Exports and Imports (Services) : (US Million)
(Provisional)	August 2016-17
Exports (Receipts)	13381.00
Imports (Payments)	8054.00
Trade balance	5327.00
Exports and Imports (Services) : (Rs. Crore)
(Provisional)	August 2016-17
Exports (Receipts)	89571.88
Imports (Payments)	53913.15
Trade Balance	35658.72

 

·                     Source : RBI Press Release dated 14th October 2016

·                     Source : Press Information Bureau, Government of India,

           

Ministry of commerce and Industry.

The commodity composition of India's foreign trade has undergone many changes since independence and more significantly after the liberalisation of economy in 1991.

In the initial decades capital goods, cereals and food items, iron-steel constituted the most important commodities of import. Among the key commodities of export were included products of agriculture and allied sector, and manufactured products like cotton yarns, fabrics, jute, leather, handicrafts etc.

In the current times the share of cereals, capital goods, iron-steel in our import basket has reduced significantly because over the decades we have developed self-reliance in these sectors. Import of important raw materials and intermediate goods like POL, gold and silver, precious and semi-previous stones, and pearls has increased over the decades.

Similarly    our key export commodities now include manufactured items like gems and jwellery, machinery and instruments, transport equipment?s, ready-made garments, drugs and pharmaceuticals and processed products of metal.

The top 10 product groups representing the highest dollar value in Indian export basket in 2016 were-Gems, precious metals (16.5%), petroleum products (10.6%) Vehicles (5.7%), Machinery (5.2%), Pharmaceuticals (5%) Organic chemicals (4.3%), clothing and accessories (3.5%), electrical equipment (3.1 %), Knit or crochet clothing (3%) Iron & steel (2.5%)

 

The Top 10 Indian Import

In 2016 included Mineral fuels including oil (25%); Gems, precious metals (13.5), Electronic equipment (10.4%), Machinery (9.1%), Organic chemicals (4.1%) Plastics (3.2%), Animal and Vegetable fats and oils (2.9%) Iron and steel (2.4%), Medical, technical equipment (2%), ships, boats (1.5%).

 

India?s Top Export Destination

 

The top ten countries that imported the most Indian shipments by dollar value during 2016 are - USA (16.1%) of Indian exports), AE (11.8%), Hng Kong (5.1%) China

(3.4%), UK (3.3%), Singapore (12.8%), Germany (2.7%),

Vietnam (2.3%), Bangladesh (2.2%) Belgium (2.1%).

 

India's Top Important in 2016

 

	Country	Percentage (%)
1.	China	16%
2.	Switzerland	5.8%
3.	USA	5.4%
4.	Saudi Arabia	5.4%
5.	UAE	5.3%
6.	Indonesia	3.4%
7.	South Korea	3.4%
8.	Germany	2.9%
9.	Iraq	2.8%
10.	Australia	2.7%

 

Balance of Payments

 

Introduction

 

Balance of payments (BOP) is statistical statement of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports.

·                     A negative balance of payments means that more money is flowing out of the country than coming in. The balance of payment is maintained by Central Bank of India, i.e.

Reserve Bank of India.

·                     Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency.

·                     BOP indicates trade balance, foreign investments and investment by foreigners. Even a negative BOP does not signify unfavourable climate for the economy. It is unfavourable only if the economy lacks the means to fill the gap created by negative BOP.

 

Balance of trade and balance of payment

·                     Balance of trade takes into account only those transactions arising out of exports and imports (the visible items). It does not consider the exchange of services rendered such as shipping. Balance of payment takes into account the exchange of both visible and invisible items.

·                     Hence, the balance of payments represents a better picture of a country's economic transactions with the rest of the world than the Balance of trade.

 

Structure of Balance of Payments Accounts

 

A balance of payments statement is a summary of a nation?s total economic transaction undertaken on international account.

It is usually composed of three sectors:

1.         Current account,

2.         Capital account,

3.         Reserve account balance.

 

Current Account

This account is the summary of all international trade transactions of the domestic country in one year. It records the following 3 items:

(i)         Visible items of trade

·                     The balance of exports and imports of goods is called the balance of visible trade, e.g. Tea, Coffee, etc.

(ii)        Invisible Trade

·                     The balance of exports and imports of services is called the balance of invisible trade. The invisbles are divided into three categories: (a) Services- insurance, travel, transportation,   miscellaneous   (like   communication, construction, financial, software, etc.), (b) Income, and (c) Transfers (grants, gifts, remittances, etc.).

(iii)       Unilateral transfers

·                     Unilateral transfers are receipts which residents of a country make without getting anything in return, e.g. gifts, etc.

 

Capital Account

·                     This account is the summary of foreign capital transactions. On the credit side of this account receipt of foreign exchange due to Foreign Direct Investment (FDI), Foreign Capital Investment (FCI) and Foreign Borrowing (FB) is recorded.

·                     On the debit side of capital account payment of foreign exchange due to Direct Investment Abroad (DIA), Portfolio Investment Abroad (PIA) and Foreign Lending (FL) is recorded.

·                     While India made the rupee fully convertible under current account, it was felt that the economy was not yet ready for capital account convertibility (CAC).

 

Reserve Account Balance

·                     This is the adjusting account in balance of payment. It makes an adjustment between current account balance and capital account balance.

·                     If the deficit in the current account is followed by surplus in capital account than the excess foreign exchange is diverted into capital account to current account so that deficit in the current account is eliminated

·                     The remaining surplus in the capital account is transferred to the Reserve account and recorded on the credit of reserve account. Therefore both Current Account and Capital Account is always balanced.

·                     The Reserve Account is also the indicator of Forex

            Reserves of the country. If surplus in the Capital Account is more than deficit in the Current Account, there is net increase in the Forex Reserves of the country at the end of the year.

·                     On the other hand if deficit in the current account is more than surplus in the Capital Account then there is net decrease in Foreign Reserves of the country at the end of the year.

 

Balance of Payment [BOP) Crisis

 

If international reserves of a country are not enough to balance a combined deficit in current and capital account on a sustained basis, then the phenomenon is called a BOP crisis. It can be tackled by exporting more or by limiting imports through tariffs, quotas, etc. Contractionary fiscal and monetary policies can also tackle the crisis through lower import demand with fall in average income levels. Another short term solution is currency devaluation which encourages exports and discourages costlier imports.

 

India's Balance of Payment

 

·                     The international Balance of Payments (BOP) of a country reflects its economic strengths and weaknesses.

A typical problem of the developing countries is that of a chronic BOP deficit, India being no exception.

·                     Our country has been facing BOP disequilibrium right since independence, culminating into a disaster in 1990- 91, the year of the acute BOP crisis. India then had foreign exchange reserve of mere 1 billion dollar, barely sufficient to finance a month?s import bill. The country was on the verge of defaulting.

·                     This crisis led to the massive changes in the country?s economic policy, popularly known as the Structural

Adjustment Program or New Economic Policy (NEP) regime, focusing on liberalization and globalization of the economy.

Trade deficit (on BOP basis) declined from USS 74.7 billion in 2014-15 (April-September) to USS 71.6 billion in 2015-16 (April-September).

 

 

Protectionist Policies

·                     The main objective of the Second Five Year Plan

·                     (1956-57 to 1960-61) was to attain self-reliance through industrialization. Self-reliance was to be achieved through import substitution.

·                     For this basic industries had to be set up which required import of capital goods. Exports were expected to automatically take-off with industrialization.

·                     The import substitution strategy was based on non-price, physical- interventionist policies like licensing, quotas and other physical restrictions on imports. Heavy capital goods were imported but other imports were severely restricted to shut off competition in order to promote domestic industries.

·                     All focus was on import substitution, with gross neglect of exports. Such inward looking protectionist policies did result in some self-reliance in the consumer goods industries, but the capital goods industries remained mostly import intensive.

·                     The high degree of protection to Indian industries led to inefficiency and poor quality products due to lack of competition. The high cost of production further eroded our competitive strength.

·                     Rising petroleum products demand, the two oil shocks, harvest failure, all put severe strain on the economy. The BOP situation remained weak throughout the 1980s, till it reached the crisis situation in 1990-91, when India was on the verge of defaulting due to heavy debt burden and constantly widening trade deficit.

 

External Debt

·                     India had to resort to large scale foreign borrowings for its developmental efforts in the field of basic social and industrial infrastructure. The country's resources were very much limited due to low per capita income and savings.

·                     The situation worsened because Government of India resorted to heavy foreign borrowings to correct the BOP situation in the short run out of panicky. By the Seventh Five Year Plan, the debt service obligations rose sharply because of harder average terms of external debt, involving commercial borrowing, repayments to the IMF and a fall in concessional aid flow.

 

Export Promotion

 

Although by the Sixth Five Year Plan we had done away with the need of food grain imports and some crude oil was being produced domestically, BOP position was still not comfortable due to low exports. The need for export promotion was felt during the 1960s. The Third Five Year Plan introduced certain export promotion policies like cash compensatory schemes, tax exemptions, duty drawbacks, Rupee devaluation, etc. However our exports remained discouraging. Indian exports depended largely on world trade situation. We were mainly primary product exporters, the price of which fluctuated heavily with fluctuations in world market demand.

·                     Primary products exporting countries have an unfavorable term of trade. The earnings from primary product exports were low and unstable.

·                     Secondly, the quality of Indian products was not up to the world standards due to which we could not sustain markets.

·                     Third, only residue products were mainly exported. The fact that export earnings also contribute to economic development was overlooked. Cumbersome procedures for license, etc. served as disincentives for exporters.

Domestic inflation further reduced the competitiveness of India's export.

 

Exchange Rate

·                     The instability of the exchange value of the rupee was another problem. The constant devaluations (to promote exports) raised the amount of external debt. The value of rupee was managed by the central bank (fixed exchange rate).

·                     The gap between official and market exchange rate created problems for the exporters and importers. The strict foreign exchange controls also encouraged hawala trade.

·                     India followed a strongly inward looking policy, laying stress on import substitution. Ideally, imports should be financed by export earnings. But because there was export pessimism, the deficit was financed either by the invisible earnings or by foreign aid or depletion of valuable foreign exchange reserve. Much import constraint to check trade deficit was also not possible because India?s imports were mainly ?maintenance imports?.

·                     On one hand import reduction was not possible and on the other exports suffered due to the recession in the 1980s.

India?s BOP was thus beset with several problems. The process of liberalization began from the mid-1980s. Restriction on certain imports were removed, particularly those which were used as inputs for export production. But by then the situation was already bad and all the mismanagement ultimately led to the 1990-91 BOP crisis.

 

Foreign Trade Policy 2015-20

 

The Government of India has announced a new FTP for the period 2015-2020 on 1st April, 2015.

Aiming to nearly double India's exports of goods and services to 900 billion by 2020, the government has announced several incentives in the five-year Foreign Trade Policy for exporters and units in the Special Economic Zones (SEZ). Unveiling the first trade policy of the NDA government, Commerce Minister Nirmala Sitharaman said the FTP (2015-20) will introduce Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS) to boost outward shipments. The new policy aims at boosting India's exports and it is believed that PM Narendra Modi?s pet projects, ?Make in India? and 'Digital India' will be integrated with the new Foreign Trade Policy.

Trade Policy (2015-20) Key Features

 

India to be made a significant participant in world trade by 2020.

·                     Merchandize exports from India Scheme (MEIS) to promote specific services for specific markets.

·                     FTP would reduce export obligations by 25 % and give boost to domestic manufacturing.

·                     FTP 2015-20 introduces two new schemes, namely ?Merchandise Exports from India Scheme (MEIS)? and ?Services Exports from India Scheme (SEIS)?.

The ?Services Exports from India Scheme? (SEIS) is for increasing exports of notified services. These schemes (MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility and usage. Incentives (MEIS and SEIS) to be available for SEZs also e-Commerce of handicrafts, handlooms, books, etc. eligible for benefits of MEIS. FTP benefits from both MEIS and SEIS will be extended to units located in SEZs.

·                     Agricultural and village industry products to be supported across the globe at rates of 3 % and 5 % under MEIS.

·                     Higher level of support to be provided to processed and packaged agricultural and food items under MEIS.

·                     Industrial products to be supported in major markets at rates ranging from 2 % to 3 %.

·                     Served from India Scheme (SFIS) will be replaced with Service Export from India Scheme (SEIS).

·                     Branding campaigns planned to promote exports in sectors where India has traditional strength.

·                     SEIS shall apply to 'Service Providers located in India? instead of 'Indian Service Providers'.

·                     The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings.

·                     Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as originating from India.

·                     Reduced Export Obligation (EO) to (75%) for domestic procurement under EPCG scheme.

·                     Online procedure to upload digitally signed document by Chartered Accountant/Company Secretary/Cost Accountant to be developed.

·                     Inter-ministerial consultations to be held online for issue of various licences.

·                     No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.

·                     Export obligation period for export items related to defence, military store, aerospace and nuclear energy to be 24 months instead of 18 months.

·                     Calicut Airport, Kerala and Arakonam ICDS, Tamil Nadu notified as registered ports for import and export; Vishakhapatnam and Bhimavarm added as Towns of Export Excellence.

·                     Certificate from independent chartered engineer for redemption of EPCG authorisation no longer required.

 

Special Economic Zone (SEZ)

 

·                     Special Economic Zone (SEZ) is a specifically delineated duty-free enclave that has economic laws different from a country's typical economic laws, usually the goal is to increase foreign investments.

·                     India was one of the first in Asia to recognise the effectiveness of the Export processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandia in 1965. With a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

·                     Today, there are approximately 3,000 SEZs operating in 120 countries which account for over US  600 billion in exports and about 50 million jobs.

·                     As a major step forward meant to invoke confidence in investors and signal the government's commitment to a stable SEZ policy regime, a comprehensive Special Economic Zones Act, 2005 was passed by the Parliament in May 2005. It received Presidential assent on the 23rd of June 2005. This Act came into force w.e.f. February 10, 2006.

 

The main objectives of the SEZ Act are:

·                     Generation of additional economic activity.

·                     Promotion of exports of goods and services.

·                     Promotion of investment from domestic and foreign sources.

·                     Creation of employment opportunities.

·                     Development of infrastructure facilities.

 

The salient features of SEZs Act are:

·                     Exemption from customs duty, excise duty, etc. on import/domestic procurement of goods for the development, operation and maintenance of SEZs and the units therein.

·                     100% income tax exemption for 5 years, 50% for the next 5 years and 50% of ploughed back export profits for 5 years thereafter for SEZs units.

·                     Exemption from capital gains on transfer of an undertaking from an urban area of SEZs.

·                     100% income tax exemption to SEZ developers for a block of 10 years in 15 years.

·                     Exemption from dividend distribution tax to SEZ developers.

·                     100% income tax exemption for 5 years and 50% for next five years for off shore banking units located in SEZ.

·                     Exemption to SEZ developer and units from Minimum Alternate Tax.

·                     CST exemption to SEZ developer and units on inter-state purchase of goods.

·                     Constitution of an authority for each SEZ with a view to providing greater administrative, financial and functional autonomy to these zones.

·                     Establishment of designated courts and a single enforcement agency to ensure speedy trial and investigation of offences committed in SEZs.

·                     Encouragement to State Governments to liberalise State laws and delegate their powers to the Development Commissioners to the SEZs to facilitate single window clearance.

 

Export Oriented Units, Export processing Zone and Special Economic Zone Schemes

·                     The Government has liberalised the scheme for export-oriented units and export processing zones. Agriculture, horticulture, poultry, fisheries and dairying have been included in export-oriented units.

·                     Export processing zone units have also been allowed to export through trading and star trading houses and can have equipments on lease. These units have been allowed cent per cent participation in foreign equities.

 

1.         Export Processing Zones

·                     Before getting converted into Special Economic Zones (SEZs), these Export Processing Zones (EPZs) were playing important role in promoting exports of the country.

·                     These zones were created to develop such an environment in the economy which may provide capability of facing international competition.

·                     The Export Processing Zone (EPZs) set up as enclaves, separated from the Domestic Tariff Area by fiscal barriers, were intended to provide a competitive duty free environment for export production.

·                     All the 8 EPZs, located at Kandia and Surat (Gujarat), Santa Cruz (Maharshtra), Cochin (Kerala), Chennai (Tamil Nadu), Vishakhapatnam (Andhra Pradesh), Faeta (West Bengal) and Noida (U.P) have been converted into Special Economic Zones.

 

2.         Export-Oriented Units

·                     Since 1981, the Government introduced a complementary plan of EPZ (Now converted into SEZ) scheme for promoting export units (making export of their cent per cent production. Under this scheme the Government provides various incentives to increase the production capacity of these units so as to increase exports of the country.

 

3.         Export Houses, Trading Houses and Star Trading Houses

·                     To increase the marketable efficiency of exporters, the Government introduced the concept of export houses, trading houses and star trading houses.

·                     Since April 1, 1994 a new category named Golden Super Star Trading Houses was added by the Government which has the highest average annual foreign exchange earnings. On March 31, 2003 there were 4 Golden Super Star Trading House working in the country.

 

4.         Export Promotion Industrial Parks (EPIP)

·                     A Centrally-sponsored 'Export Promotion Industrial Park (EPIP)? scheme was introduced in August 1994 with a view to involving the state governments in the creation of infrastructure facilities for export oriented production.

It provides for 75% (limited to 10 crore) grant to state government towards creation of such facilities.

·                     The Central Government has so far approved 25 proposals for establishments of EPIPs in the states of Punjab, Haryana, Himachal Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra, Tamil Nadu, Andhra Pradesh, U.P., Gujarat, Bihar, J&K, Assam, M.P., West Bengal, Odisha, Meghalaya, Manipur, Nagaland, Mizoram and Tripura.

·                     At present, the number of formally approved SEZs is 413, 327 SEZs have been notified, 202 SEZs are operational and the total number of units approved in SEZs is 4,102.

·                     A total investment of Rs. 3, 48,983.22 crores has been done till 2015. Moreover, till now 15, 04,597 persons have received employment through SEZs.

 

Foreign Direct Investment (FDI)

 

Foreign direct investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased. The Organisation of Economic Co-operation and Development (OECD) defines control as owning 10% or more of the business. Businesses that make foreign direct investment are after called Multinational Corporations (MNCs) or Multinational Enterprises (MNEs).

·                     A MNE may create a new foreign enterprise by making a direct investment, which is called a Greenfield investment.

·                     A MNE may make a direct investment by the acquisition of a foreign firm, which is called an acquisition or prawn field investment.

 

Advantages of foreign Direct Investment

1.            Economic Development Stimulation.

2.            Easy International Trade.

3.            Employment and Economic Boost.

4.            Development of human capital Resources.

5.            Tax incentives.

6.            Resource Transfer.

7.            Reduced disparity between revenues and costs.

8.            Increased productivity.

9.            Increment in income.

 

Disadvantages of Foreign Direct Investment

1.            Hindrances to domestic Investment.

2.            Risk from political changes.

3.            Negative influence on exchange rates.

4.            Higher costs.

5.            Economic non-viability.

6.            Expropriation.

7.            Modern-day Economic colonialism.

 

·                     FDI, being a non-debt capital flow, is a leading source of external financing, especially for the developing economies. It not only brings in capital and technical know-how but also increases the competitiveness of the economy.

·                     The current phase of FDI policy is characterized by negative listing, permitting FDI freely except in a few sectors indicated through a negative list. Under the current policy regime, there are three broad entry options for foreign direct investors.

1.         In some sectors, FDI is not permitted (negative list);

2.         In another small category of sectors, foreign investment is permitted only till a specified level of foreign equity participation, and

3.         The third category, comprising all the other sectors, is where foreign investment up to 100% of equity participation is allowed. The third category has two subsets ?

a.         one consisting of sectors where automatic approval is granted for FD! (Often foreign equity participation less than 100 %), and

b.         the other consisting of sectors where prior approval from the Foreign Investment Approval Board (FIPB) is required.

·                     FDI policy changes increasingly reflect the requirements of industry and are based on stakeholder's consultation.

Upfront listing of negative sectors has helped focus on reform areas, which are reflected in buoyant FDI inflows.

 

Foreign Direct Investment Policy 2016

 

The FDI policy amendments are meant to liberalize and simplify the FDI policy so as to provide ease of doing business is the country leading to larger FDI inflows contributing to growth of investment, incomes and employment. Measures undertaken by the Government, in previous years, have resulted in increased FDI inflows at US 55.46 billion in financial year 2015-16, as against US  36.04 billion during 2013-14. This is the highest ever FDI inflow far a particular financial year. However, it was felt that me country has potential to attract far more foreign investment which can be achieved by further liberalizing and simplifying the FDI regime. Thus changes introduced in the FDI policy 2016 included increase in sectoral caps, bringing more activities under automatic route and easing of conditionalities for foreign investment. The amendments have made India the most open economy in the world for FDI.

 

FDI 2016 in Various Sectors

 

Sector	Limit	Entry Route
Food Products (Manufactured/ Produced in India)	100%	Government
Defence	100%	Government
Broadcasting Carriage Services	100%	Automatic
Brownfield pharmaceuticals	74%	Automatic
Brownfield Airport Projects	100%	Automatic
Animal Husbandry	100%	Automatic
Agriculture	100%	Automatic
Construction Development: Townships, Housing, Built-up Infrastructure	100%	Automatic
Industrial Parks	100%	Automatic
Telecom Services	100%	Upto49%- Automatic Above 49%- Government
Multi Brand Retail Trading	51%	Government
Banking?Private Sector	74%	Upto49%? Automatic Above 49%? Government &Upto74%
Banking?Public Sector	20%	Government
Insurance	49%	Automatic
Pension	49%	Automatic